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Locke Lord QuickStudy: ‎“International” Issues in an Otherwise “Domestic” Deal‎

Locke Lord LLP
December 29, 2020

Covid has wreaked havoc on deal numbers and the economy generally, but one light at the end ‎of the tunnel we are all hopefully approaching quickly is that buyers with significant cash ‎reserves will start to buy companies and assets that need to sell as a result of those economic ‎troubles. Some of those buyers will be non-US individuals or entities coming to America to hunt ‎for opportunities, and accordingly a good number of US in-house lawyers who have spent their ‎entire careers doing purely domestic transactions will need to get up to speed on the ‎‎“international” aspects of the sale of a company or assets that have always been purely domestic.‎

Although a lawyer on the sell side of such a transaction will have a considerably smaller ‎number of “international” issues to think about than a lawyer on the buy side, of course, the ‎issues a sell side lawyer needs to master are still important and very likely to be novel for ‎someone who has always done domestic work. This piece discusses some of the main ‎‎“international” issues you should consider if you find yourself on the sell side of such a ‎transaction.‎

Prohibited Parties – A threshold issue for any sale to a non-US party is whether the ‎prospective buyer is on any of the prohibited persons lists maintained by the US federal ‎government. The Bureau of Industry and Security maintains lists of persons/entities prohibited ‎from exporting from the United States (the Denied Parties List) or from receiving exports or re-‎exports of goods, software or technology that is subject to US export control laws (the Entity ‎List and the Unverified List). The Office of Foreign Assets Control (“OFAC”) also has the ‎Specially Designated Nationals list (“SDN List”) and other lists. Importantly, OFAC considers ‎any company that is owned 50% or more by someone on the SDN List to be an SDN. Of note, if ‎you manufacture or export defense articles or defense services, the Directorate of Defense Trade ‎Controls has a Debarred Persons Lists as well as a list of countries that are subject to an arms ‎embargo. Although it is relatively unusual for someone looking for US companies or assets to ‎show up on one of these lists, it definitely happens. A quick check of these lists to make sure ‎your counterparty – and in some cases its owners/principals - is not on one of them is definitely ‎time well-spent. ‎

CFIUS – The Committee on Foreign Investment in the United States (“CFIUS”) is an ‎interagency committee of the federal government that reviews foreign investments in US ‎businesses and real estate. The law makes some filings with CFIUS discretionary, while others ‎are mandatory. Determining whether a filing is mandatory takes some analysis, of course, but ‎determining whether a discretionary filing should be made takes both analysis and a good bit of ‎judgment. Even if a filing was discretionary, the President may unwind a transaction if CFIUS ‎determines that the transaction raises national security risks (whether a filing was made or not). ‎Accordingly, the need for a CFIUS review is decidedly not just a buyer issue but also something ‎a US seller should also examine closely. In addition, from a purely logistical perspective, the ‎timing of the filing should be incorporated into the transaction closing timeline.‎

ITAR –  If you are in the defense space, the International Traffic in Arms Regulations ‎‎(“ITAR”) have pre-closing filing requirements that are similar to those under the CFIUS ‎regulations when selling to a buyer that is owned or controlled by a foreign person or entity. ‎Importantly, ITAR covers not only products that most people would consider “arms” but also ‎products that many people would never expect to be covered. As a result, any company that sells ‎products to the defense industry or defense contractors should ensure it has a solid grasp of its ‎product classifications - for ITAR and other purposes.‎

Deemed Exports – Even if your company has never exported a single product or has no ‎intention of doing so, you need to be aware of the deemed export rules if you plan on selling ‎assets or a company to a non-US buyer. Under the Export Administration Regulations (and ‎similar rules under the ITAR), a “deemed export” occurs whenever certain controlled technology ‎and information is disclosed or made accessible to a non-US person – and a sale of an entity or ‎assets that includes that technology or information, regardless of whether the buyer takes the ‎assets outside the US, could qualify. If it does qualify, then the seller needs to obtain a license to ‎consummate the transaction (assuming it would not be barred, which is also a possibility). ‎

Some of these issues require a simple check in many/most cases, but some require more ‎substantial analysis. Doing the appropriate diligence on all of them up front, however, can ‎prevent a significant amount of cost and trouble later – and hopefully put you on the path to a ‎successful closing. ‎

Please visit our Adapt. Adjust. Advance. Resource Center often for up-to-date information on ‎‎navigating these and other important legal considerations in the post-pandemic reality.‎

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